§ 01
| Constraint | What It Limits | Typical Range |
|---|---|---|
| Investment-grade target | Keep rating above BBB− | Debt/EBITDA < 3–4x |
| Covenant headroom | Stay above minimum DSCR | DSCR > 1.5–2.0x |
| Industry norms | Don’t deviate too far from peers | Within 1 standard deviation |
| Strategic flexibility | Maintain capacity for M&A or downturns | Unused revolver + cash buffer |
§ 02
Theory says maximize debt until the tax shield equals marginal distress cost. Practice says maintain a buffer for bad times. The companies that go bankrupt are often those that optimized capital structure for good times only.
§ 03
Compare leverage ratios across a peer group in **Fundamentals**. Is the most leveraged company the cheapest (lowest WACC) or is it priced at a discount due to distress risk?
§ 04
A CFO proposes taking leverage from 2x to 5x Debt/EBITDA to lower WACC. What’s the risk?
§ 05
§ 06
Optimal capital structure — is it the leverage ratio that MAXIMIZES ROE, or MINIMIZES WACC?
Five questions · AI feedback
Sit with the ideas.
A BBB-rated industrial company has Net Debt/EBITDA of 3.2x, interest coverage of 4.5x, and its sector median for BBB is 2.5-3.5x leverage. Management proposes a leveraged recapitalization to buy back shares, pushing leverage to 4.5x. What is the likely consequence?
Why: